How Much Will Erdoğan's Victory Cost The Country?

Turkish voters have just made their country the model for every dictator and the envy of every wanna-be dictator in the world. President Tayyip Erdoğan convinced 52% of the voters to give him unprecedented powers to run the country exactly as he sees fit. Separation of powers? Forget it. Independent journalism? Independent judiciary? Forget it. Parliamentary checks and balances? Forget it.

Erdoğan now has the power to rule by decree, appoint cabinet ministers and senior officials answerable only to him, and appoint senior judges. In short, Erdoğan is free to impose his 19^th century vision on Turkey. I was going to say 16^th century, but there were some very enlightened Ottoman rulers during that period.

With his absolute power where will he take Turkey?

The opposition put up a spirited fight, but in the end they were no match for the sheer organizational skills of the ruling Justice and Development Party (AKP) and the charismatic power of a ‘strong man’ who said the dictatorial rule was necessary to restore Turkey to its rightful place in the world – wherever that might be. He has the typical autocrat’s disdain for the necessary, messy compromises or checks and balances of real democracy. Why bother with other people’s opinions when your own ideas are so good? Waste of time, really.

One sure thing was Erdoğan’s determination to use every means – fair or foul -- at his disposal to win this election. And after 16 years of near absolute control it is fair to say he has many more weapons at his command than the opposition to control the outcome of an election.

While the physical act of voting may have been more or less free, it would be a serious mistake to call these elections ‘free and democratic’ in the true sense of the phrase. All Erdoğan’s opponents faced severe restrictions on media exposure during the campaign. In addition to the media outlets owned by Erdoğan’s henchmen or by people intimidated by him, even the state TV station found reasons to keep the opponents off the air. The campaign of Meral Akşener, leader of the IYI Party, also faced frequent assaults and attempts by local Erdoğan supporters to prevent her election rallies. Selahattin Demirtaş, leader of the Kurdish-based HDP party, had to run his campaign from the prison where he has been kept for a couple of years on unspecified charges. In these circumstances it’s a minor miracle that the opponents performed as well as they did. A cynic would say it was all part of Erdogan's game plan. Let Ince run relatively free, but inhibit and intimidate the other two so their vote total won't challenge Erdogan. Crude, but effective.

Ince did well, but got no help from the other opposition parties

Other than Erdoğan’s personal victory there were a few interesting election results:

1.     Erdoğan’s main opponent, Muharrem Ince, performed exactly as he predicted, winning just under 31% of the presidential vote. He ran well ahead of his party, the CHP, raising the expectation that he may assume leadership of the party and inject some much-needed vitality. His problem was that Akşener and Demirtaş combined did not get enough votes to help force the presidential election into the second round. But, given the restrictions their campaigns faced, that is no surprise.

2.     HDP, the Kurdish party, secured enough votes (11.7%) to enter parliament with 67 MPs, making them the third largest group. HDP’s vote was undoubtedly helped by voters from other parties who voted tactically just to make sure HDP passed the 10% threshold. 

Selahattin Demirtas: Tough to run a campaign from behind bars

                       

3.     Erdoğan ran way ahead of his AKP that received just over 42% of the vote, down from previous elections. This reconfirms the president’s star power while demonstrating that at least some of the party’s former voters are beginning to lose faith with the party.  AKP now has 293 MPs, below the 300 required to give them total control of parliament. They will have to rely on the 50 MPs from the ultra-nationalist party MHP to exercise what little authority left to the parliament. Look for Turkish policy to become even more anti-Kurdish and bellicose.

4.     The two rival nationalist parties, MHP and the newly-formed, IYI party combined received more than 20% of the vote, far above the usual result for the nationalists. Perhaps the government’s strident anti-Kurdish rhetoric and military incursions into Syria and Iraq inspired this burst of nationalist fervour. Things don't look good for Demirtaş's early release.

Assaults and boycott by most media hurt her campaign

It remains to be seen just what Erdoğan will do with his sharply enhanced powers. One would like to think he might use them to help unite a badly fractured country and society. Nice, but, given past performance, not too likely. He might also move aggressively to counter the country’s mounting economic problems. Unfortunately, he has shown absolutely no sign that he even understands the gravity of the situation, let alone have any idea how to solve the problems.

During the campaign he re-iterated his plan to force the Central Bank to reduce interest rates as the best way to fight the increasing inflation and depreciating currency. This will not have a happy ending.

He also stressed his commitment to huge, budget-busting public works projects that will do little except feed his fervent contractor allies while putting great stress on an already weakened budget. One of his pet projects is the so-called Kanal Istanbul, a canal rivalling the Suez Canal to run from the Black Sea to the Sea of Marmara bypassing the Bosphorus Straits. It’s not clear where the $20 billion or so funding will come from, but the hapless and overstretched state banks will undoubtedly be called upon to provide the funds.

While he is touting grandiose projects, the real problems of inflation, unemployment, mounting current account deficit, depreciating currency and a tattered education system designed more for quill pens and rote memory than computers are only getting worse. On top of this the once-strong agriculture sector is reeling, forcing Turkey to import more and more basic food products like onions and potatoes.

At some point, these problems will snowball into a real economic and social crisis. But for the moment Erdoğan is free to delude himself that they are all the fault of the usual suspects – ‘foreign interests’ that are afraid of Turkey. This plays well in domestic elections, but doesn’t do much to convince those same ‘foreign interests’ to lend you a hand when you desperately need it.

Tariffs Alone Are Only A Small Part Of International Trade Imbalances

            President Trump’s recent shallow, sound-bite tirades about trade tariffs, as usual, miss the much larger point that tariffs, by themselves, are merely the smallest weapon in the powerful armoury of schemes used by several nations to protect and promote their own companies.

            In fact, there are few more mind-numbing, dizzyingly complex subjects than foreign trade. To get a clearer picture of the realities of international trade I highly recommend a book called The Travels of a T-Shirt in the Global Economy by Georgetown professor Pietra Rivoli. She says Chinese T-shirts may flood the American market, but the vast majority of the cotton used in those T-shirts comes from the United States, West Texas to be precise. Indeed, the United States is one of the leading cotton exporters in the world. Rivoli notes the impotence of tariffs to stop world trade by pointing out that “Though only about 2 percent of Americans’ clothing is made in the United States, tariffs remain among the highest of any manufactured goods.”

Much to be learned from the the humble T-shirt

            Rivoli notes that in addition to the ingenuity and incredible hard work of the West Texas cotton farmers they have been very adept at utilizing the vast array of research support from nearby Texas Tech University and the bright people at Monsanto who develop varieties of cotton seeds that can withstand the harsh climate of that part of Texas.

            But it is in rallying the political support for millions of dollars of federal subsidies in the form of disaster relief, price supports, insurance, export credits, and many other details that give American cotton a huge advantage in the world trade. Some of America’s poorer competitors in Africa have complained to the World Trade Organization  (WTO) that American cotton subsidies amount to more than their entire GDP. These subsidies and technological advantages help explain why fabric manufactures in countries like Turkey prefer to import American cotton rather use local cotton grown just a few miles from their factories. "It's cheaper and better," one of them explained to me.

West Texas cotton - a powerful force in global textiles

            Brazil, another large sophisticated cotton producer, had a unique and successful response to what it termed unfair cotton subsidies. Rather than institute countervailing higher tariffs that would ultimately punish Brazilian consumers, the clever Brazilians won permission from the WTO to impose other penalties on other American goods. Brazil won the right to suspend normal intellectual property protections – a subject dear to American companies – for goods such as pharmaceuticals and engineered seeds, and to institute trade protection for Brazilian service firms. This cross-retaliation shifted the cost of American cotton subsidies to other companies like Microsoft, Monsanto, and Intel. Not surprisingly, the day before these measures were to take effect a settlement was reached with Brazil on the issue of cotton subsidies. The European Union might want to think about this Brazilian approach rather than simply slap higher tariffs on various American goods.

            These subsidies are part of $500 billion Farm Bill that covers several types of agriculture as well as nutrition programs like Food Stamps for low-income Americans. This farm bill is due to expire in September 2018, and its replacement is a ticking time bomb for politicians running for re-election in November. The replacement faces a very hard road, and it is by no means clear that Congress will be able to draft something that will please one of Trump’s constituencies – the farm belt. The nutrition part of the bill is one of the more contentious items as many of the die-hard conservatives hate the idea of using federal subsidies for low-income families. And many Blue State members of Congress won’t agree to any farm bill that doesn’t include such subsidies. This fight will rival the noise of the health care debate.

           

            This federal largesse is by no means limited to agriculture as a wide swath of American business benefits from federal, state, and local assistance. A report published by Good Jobs First highlightsthe scope of these benefits.

            Topping the list of those receiving federal grants, tax credits, or cash payment in lieu of tax credits is not an American firm at all. The Spanish energy company Iberdrola has invested heavily in wind farms in the United States, and now bills itself as the second largest wind farm operator with more than 40 projects from California to New England. Iberdrola has collected $2.2 billion in federal grants and/or tax credits. This staggering sum raises the question of whether renewable energy like wind power can exist without these handouts.

            American tax payers should have no fear, however, because the champion for federal, state, and local subsidies is Boeing. Boeing has received $457 million in non-repayable federal grants, $64 billion in federal loan guarantees, and $13 billion in state and local subsidies. This is a very bi-partisan effort. In 2014 the Democratic governor of Washington signed a bill giving Boeing an $8.7 billion tax break over the next 27 years in an attempt to keep the 777X production in Washington state. This has become a hot issue as Boeing returned the favor by continuing to ship jobs out of state despite all the local assistance.

Took off with the massive help of U.S. taxpayers

            These types of tax-payer give-aways are by no means an American invention, however. The European Union has a huge program of agricultural assistance – similar to the American farm bill -- known as the Common Agricultural Policy (CAP) that takes about 35% of the entire EU budget. A French farmer friend grumbles that those payments are directed primarily at large industrial farms and omit smaller operations like his. And Airbus, like Boeing, receives considerable subsidies.

            The conclusion, as Pietra Rivoli points out, is that so-called ‘free trade’ is a myth that many love to talk about but no one really dares to practice. Uncle Sam doesn't just put his thumb on the scales. He puts his entire heavy leg. If Trump is really serious about levelling the playing field he would address all these federal, state, and local handouts instead of focusing merely on tariffs. But don’t hold your breath.

Can The Perfect Economic Storm Change Turkey's Leadership?

For the first time in his long reign, Turkish President Tayyip Erdoğan is facing strong headwinds in his re-election bid. For one thing, the opposition has finally acquired some common sense and formed a coalition to run in the parliamentary elections. A second thing causing Erdoğan problems is that his main opponent in the presidential race – separate from the parliamentary election -- is not afraid of a fight. Muharrem Ince is copying Erdoğan’s play book by travelling around the country holding rousing rallies in the same small cities and towns that brought Erdoğan to power 17 years ago. His campaign of blasting the corruption, nepotism, and dictatorial style of Erdoğan’s regime has been gaining traction.

Can Muharrem Ince dethrone the Reis?

But it is the failing economy that has caused the major problem for the president this time. Basically, Erdoğan is making the same miscalculation of everyone who thinks good economic fortune was due to his skill rather than pure luck. For more than a decade Erdoğan enjoyed the fruits of the global economic conditions of extremely low interest rates, sharply declining oil prices, low inflation, and – most of all – plentiful liquidity, i.e. lots and lots of money sloshing around the world looking for a home that offered slightly better returns than the near-zero percent U.S. Treasury yields. A great deal of that money found its way to Turkey. How much of that money subsequently found its way to hidden off-shore bank accounts is a hot issue in this campaign.

These global conditions stabilized the Turkish lira at relatively high levels. Many Turkish businesses and government officials thought they were geniuses and started to load up on what appeared to them ‘cheap’ foreign currency debt. The favourable exchange rates encouraged all economic players to import ‘cheap’ imported goods rather than rely on local manufacturing. This was to have disastrous consequences for many Turkish businesses. But it wasn’t just manufacturing that was hit. Agriculture, once one of Turkey’s strong points, has been hard hit as well. A recent report in Al-Monitor notes that the government’s ‘cunning plan’ to limit inflation by increasing imports of ‘cheap’ agricultural goods has decimated the country’s once-powerful agricultural sector. Production is down to the point where the country has to import straw from Bulgaria and sacrificial animals for the Feast of the Sacrifice. There are even reports that one region had to import a shepherd.

Erdoğan’s economic policies are rather like the game of musical chairs. Everything is fine until the music stops. And Turkey’s economic music came to a crashing halt when those once-favourable global conditions suddenly changed. Despite the president’s constant bluster many people were well aware of the risks that Turkey was running. The country has many fine economists who have been sounding alarm bells for a long time. But inside the sound-proof bubble that surrounds Erdoğan no one heard a thing. Even if some faint sound penetrated the thick walls of flattery supporting the grandiose presidential palace it was dismissed merely as ranting of Turkey’s ‘enemies’ trying to keep the country down.

Consequently, Turkey now faces a perfect storm of economic problems:

1.     Rapidly depreciating currency.

2.     High private sector foreign currency debt

3.     Rising inflation

4.     Rising unemployment

5.     Growing current account deficit requiring even more foreign currency to cover

6.     Rising oil prices

7.     Increasing global interest rates

Despite this reality Erdoğan and his group of sycophants still try to peddle the very bizarre economic theory that reducing interest rates and boosting consumer spending is the real way to beat inflation. This is roughly equivalent to pouring gasoline on a roaring fire. A few weeks ago Erdoğan took this theory to London where he held a series of disastrous meetings with institutional investors. After politely listening to this nonsense for a while the investors quickly hit the ‘Sell’ button for the Turkish Lira sending it to historic lows. This set off alarm bells even in the presidential palace. Deputy Prime Minister Mehmet Şimşek and hapless Central Bank Governor Murat Çetinkaya were sent back to London in an effort to repair the damage. As one wag put it, it was not clear if Şimşek – who used to work at Merrill Lynch – was seeking political asylum or trying to explain the unexplainable. The currency has precariously settled at a very low level as investors wait for the next round of inflation numbers with their fingers hovering over the ‘Sell’ button on the Turkish Lira.

Tayyip Erdoğan -is the same fire there this time?

 Does all this bad economic news mean Erdoğan will lose the election? Not at all. His base of support, like Donald Trump’s true believers, is rock solid, laps up everything he says and generally accepts his version of reality. Plus, he has complete control of the media and can effectively shut out the opposition. In many ways this situation reminds me of Edwin Edwards, the former governor of Louisiana – whose politics closely resemble Turkey’s, who once bragged that  "The only way I can lose this election is if I’m caught in bed with either a dead girl or a live boy."

But for the first time the opposition is putting up a fight, chipping away at the edges of Erdoğan’s support, using his own words to taunt him and forcing him into unaccustomed mistakes. Many opposition figures estimate they will have to win well over 50% of the vote to overcome anticipated vote rigging by Erdogan’s ruling party. About 60 million people have the right to vote, and the difference created by even a small amount of rigging could shift a close result. But for the first time in many years the results are not a foregone conclusion. The June 24 election night will be interesting indeed.